apartment overview and outlook q4 2017 · since its q4 2004 peak of 69.2%; in q4 2017 it was 64.2%....

Econometric Advisors

APARTMENT OVERVIEW AND OUTLOOKQ4 2017

2 Q4 2017 | APARTMENT OVERVIEW AND OUTLOOKCBRE ECONOMETRIC ADVISORS

STRONG CONSUMPTION, HIGHER PRIVATE INVESTMENT AND THE NEW TAX PLAN ARE EXPECTED TO DRIVE GROWTH, BUT EMPLOYMENT GROWTH IS SLOWING• In January, monthly job growth’s trailing 12-month average was down to 176,000 jobs from January 2017’s 208,000.

Hurricane impacts affected certain service sectors, but the broader slowdown has been driven by a tight labor market.

• With firms competing to hire workers from a shrinking talent pool, January registered the strongest wage growth in nine years. Wage growth may continue to quicken if the unemployment rate continues to decline.

THE OUTLOOK FOR 2018 IS STRONGER THANKS TO PASSAGE OF TAX BILL• Federal tax reform will stimulate the economy in the medium term, while also straining the government’s already weak

fiscal position.

• With the U.S. economy’s negative output gap having closed, the new tax cuts are likely to raise inflation. Along with an increasingly tight labor market, this may make the Fed more hawkish, prompting further rate increases that could tighten financial conditions later in the year and lead to lower growth in 2019.

• We’ve revised our baseline forecast for 2018 GDP growth upward 20 bps—to 2.6%. Our upside and downside forecast scenarios, while reflecting a wider range of outcomes and policy uncertainty, remain unchanged from last quarter.

THE U.S. ECONOMY WILL REMAIN ON FIRM FOOTING IN 2018JOB GROWTH WILL MODERATE AS LABOR MARKET TIGHTENS FURTHER


LABOR MARKET TIGHTENS, WAGE GROWTH STILL STRONGEMPLOYMENT GROWTH, YOY (%)

Source: CBRE Econometric Advisors, Q4 2017.

• The unemployment rate fell from 4.2% to 4.1% QOQ; the labor force participation rate remained stable, MOM, at 62.7%.

• Low unemployment is making it difficult to find qualified workers, however, which is slowing the trend in employment growth.

• Wage growth is healthy; January’s YOY rate of 2.9% is the highest of the current cycle.

• Further wage growth will benefit renters and landlords alike by improving affordability. Rent growth has slowed more in markets with low affordability—especially in Class A.

• Expect both slowly rising wage growth and slowing employment growth to continue.

WAGE GROWTH, YOY (%)

(6)

(4)

(2)

0

2

4

Mar-0

8

Mar-0

9

Mar-1

0

Mar-1

1

Mar-1

2

Mar-1

3

Mar-1

4

Mar-1

5

Mar-1

6

Mar-1

7

Total Nonfarm

1.5

2

2.5

3

Mar-1

4

Jul-1

4

Nov-1

4

Mar-1

5

Jul-1

5

Nov-1

5

Mar-1

6

Jul-1

6

Nov-1

6

Mar-1

7

Jul-1

7

Nov-1

7

All Private


HOMEOWNERSHIP RATE MOVES UP SLIGHTLY IN Q4 2017

Source: U.S. Bureau of the Census, CBRE Econometric Advisors, Q4 2017.

U.S. HOMEOWNERSHIP RATE (Q1 1997-Q4 2017)• The homeownership rate has steadily declined since its Q4 2004 peak of 69.2%; in Q4 2017 it was 64.2%.

• The Q2 2016 rate (62.9%) was a 20-year low; it has since risen 130 bps and looks to have stabilized.

• The Q4 2017 rate (64.2%) was up 50 bps YOY; its movement over the past two years has been mostly sideways.

• With the rate so far below its 20-year average (66.7%), some continued mean reversion is very likely.

• Even if homeownership preferences by age cohort don’t change, the aging population will slowly push the ownership rate modestly higher. 62

63

64

65

66

67

68

69

70

Q1 19

97Q4

1997

Q3 19

98Q2

1999

Q1 20

00Q4

2000

Q3 20

01Q2

2002

Q1 20

03Q4

2003

Q3 20

04Q2

2005

Q1 20

06Q4

2006

Q3 20

07Q2

2008

Q1 20

09Q4

2009

Q3 20

10Q2

2011

Q1 20

12Q4

2012

Q3 20

13Q2

2014

Q1 20

15Q4

2015

Q3 20

16Q2

2017

(%) Homeownership Rate 20 Yr. Avg.


LONG-TERM RATES HAVE FOLLOWED INFLATION EXPECTATIONS LOWER

10-YEAR TREASURY RATE (%)

Source: Board of Governors of the Federal Reserve System, CBRE Econometric Advisors, Q4 2017.

• From October 2016 to March 2017, the 10-year rose 125 bps—from 1.37% to 2.62%. The increase was comparable to the 135-bps run-up during the “taper tantrum” of 2013 (1.66% to 3.01%).

• The 10-year Treasury has since remained between 2.0% and 2.7%.

• The 10-year yield recently moved to a multiyear high due to the passing of a tax bill that will likely boost growth and inflation.

• Still, that movement was fairly minimal, bringing the yield in line with post-election levels—implying that growth and inflation expectations haven’t changed much.

• The unwinding of the Fed balance sheet will likely put some upward pressure on longer-term rates. 1.0

1.5

2.0

2.5

3.0

3.5

2013

2014

2015

2016

2017

2018

U.S. apartment absorption remained robust through Q4 2017; supply still outstripped

demand slightly, despite weather and labor shortage-

related delays.


PEAK COMPLETIONS IN 2018

Source: Axiometrics Inc., CBRE Econometric Advisors, Q4 2017.

STATE OF THE APARTMENT MARKET

• The Sum of Markets vacancy rate rose 10 bps, YOY, to 4.9%.

• For the past five years, fourth-quarter vacancy rates have trended between 4.6% and 5.1%.

• Strong completions (4-qtr sum: 265,865) led to the marginal increase in vacancy.

• Robust absorption (4-qtr sum: 241,233) was at its highest since 2010. Absorption is expected to hit a new high in 2018.

• Strong demand will help to moderate vacancy through 2018; our models predict a modest 20-bps rise in vacancy during that time. 3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

(100,000)

0

100,000

200,000

300,000

400,000

500,000

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Completions Net Absorption Vacancy

Forecast

VACANCY RATE (%)NET ABSORPTION, COMPLETIONS (UNITS)


SUPPLY TRENDS: SOME MARKETS SHOWING MORE RISK


ANNUAL STOCK GROWTH (%) • For the Sum of Markets, the past year’s supply growth (1.8%) exceeds the long-run average (1.1%).

• Although the same holds for many individual markets, supply growth has trended down in those with the largest supply pipelines.

• The growth of supply is weighing on rent growth and will likely continue through H1 2018.

• Even with new deliveries, continued strong employment growth and subsequent net absorption will help many of these markets outperform the Sum of Markets.

• Rent growth will continue to hold up well in large, non-gateway markets.

4.7 4.54.2 4.1

3.6 3.5 3.4 3.3 3.33.0 2.9 2.9 2.8 2.7 2.7 2.6 2.5 2.3 2.2 2.2

1.8

0.0

1.0

2.0

3.0

4.0

5.0

6.0

San A

ntonio

Green

ville

Austi

n

Nash

ville

Charl

otte

Salt L

ake C

ity

Denv

er

West

Palm

Beac

h

Orlan

do

Seatt

le

Kans

as Ci

ty

Ralei

gh

Colum

bus

Memp

his

Portla

nd

Dalla

s

Lexin

gton

Fort L

aude

rdale

Minn

eapo

lis

Tulsa

Sum

of Ma

rkets

Last 12 Months Long-Run Average


DEMAND IS STRONG IN SECONDARY MARKETS


• Markets that have posted strong absorption figures over the past year are scattered across the U.S. and include Austin, Nashville, Orlando, Denver and Pittsburgh.

• The common thread: most of these markets are smaller secondary markets where renting is generally more affordable.

• Of the past year’s top 20 absorption markets, only Houston is in the top 10 by inventory size.

• In just one gateway market has demand outpaced the Sum of Markets: Washington, D.C.

• Expect secondary markets to outpace gateway markets in demand growth over the near term.

4-QTR NET ABSORPTION AS A PERCENT OF CURRENT INVENTORY—TOP 20 MARKETS

3.63.5 3.4 3.4 3.3

3.1 3.1 3.0 3.02.9

2.72.5

2.4 2.3 2.3 2.3 2.3 2.3 2.2 2.2

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Green

ville

Orlan

do

Austi

n

Denv

er

Hous

ton

San A

ntonio

Nash

ville

Salt L

ake C

ity

El Pa

so

Charl

otte

Colum

bus

Kans

as Ci

ty

Portla

nd

Memp

his

West

Palm

Bea

ch

Norfo

lk

Las V

egas

Pittsb

urgh

Tamp

a

Ralei

gh

(%)

Sum of Markets: 1.6 %


FEWER MARKET POSTED VACANCY DECLINES IN Q4 2017

Source: Axiometrics Inc., CBRE Econometric Advisors, Q4 2017.

• Sum of Markets YOY vacancy rate: 4.9%(up 10 bps from 4.8%).

• Vacancy rates declined in 21 markets, YOY. It increased in 36 and for the Sum of Markets. Six markets registered no change.

• The greatest vacancy rate increases are occurring in markets where supply growth is strong (Nashville, San Antonio, Seattle) and/or markets where economic factors have slowed demand growth (St. Louis, Cleveland).

• In the markets where vacancy rates continue to decline, most of the tightening is due to a lack of completions and not necessarily to spikes in net absorption—although there are a few exceptions.

CHANGES IN VACANCY, TOP & BOTTOM TEN (PAST 4 QUARTERS, BPS)

-180-170

-110-90

-50-40-40-40-40

-307070

80808080

9090

100120

(200) (150) (100) (50) 0 50 100 150

HoustonEl Paso

PittsburghRichmond

JacksonvilleOrlando

ProvidenceRiverside

TucsonHartfordSeattle

TulsaChicago

Fort WorthNashville

West Palm BeachClevelandSt. LouisLouisville

San Antonio

Sum of Markets: +10 bps


STRONG NUMBERS FROM MANY OF THE 20 LARGEST MARKETS


NOMINAL RENT GROWTH (YOY, %)• Sum of Markets (SoM) YOY rent growth: -0.3%.

• 14 of the 20 largest markets nevertheless recorded positive nominal rent growth, YOY. Phoenix topped the list with 3.6%.

• New York was the laggard among the large markets, with a YOY change of -4.7%.

• If we remove New York, which accounts for 13.1% of our SoM inventory, from the SoMcalculation, rent growth was 1.1%—a figure more in line with most markets’ results over the past year.

• For most major markets, rent growth will remain above the SoM average over the next four quarters. The number of markets posting positive YOY rent growth went unchanged from Q3 2017.

Sum of Markets: -0.3

(6)

(5)

(4)

(3)

(2)

(1)

0

1

2

3

4

Phoe

nix

Denv

er

Atlan

ta

Baltim

ore

Hous

ton

Tamp

a

San D

iego

San F

rancis

co

Dalla

s

Seatt

le

Wash

ington

, DC

Detro

it

Los A

ngele

s

Minn

eapo

lis

Miam

i

Sum

Of M

arkets

Bosto

n

Phila

delph

ia

Oran

ge Co

unty

Chica

go

New

York


RENT GROWTH TO OUTPERFORM IN SMALL & COASTAL MARKETS

TWO-YEAR BASELINE FORECAST: ANNUAL NOMINAL RENT GROWTH (%)• Sum of Markets annual rent growth of -0.5% is forecast for the next two years. This is due in part to our call for a mild recession in late 2019 and early 2020.

• Secondary and tertiary markets dominate the rent growth forecast; just three of the 20 largest markets are among the top 20 for two-year forecast rent growth.

• Tampa leads the major markets, with annual growth of 2.0% forecast.

• Ten of the top 20 markets for forecast rent growth are in California (5) or Florida (5).

• Our baseline outlook favors markets with weaker supply growth and stronger growth in professional services employment.

3.6 3.53.2

2.7 2.62.2 2.2 2.0 2.0 1.9 1.9 1.8 1.8 1.8 1.8 1.6 1.6 1.5 1.3 1.3

-0.5

(2)

(1)

1

2

3

4

5

Newa

rk

Long

Islan

d

Orlan

do

Jacks

onvil

le

Oakla

nd

Richm

ond

Sacra

mento

Tamp

a

Colum

bus

Hous

ton

Ventu

ra

West

Palm

Beac

h

Hono

lulu

Norfo

lk

Fort L

aude

rdale

Indian

apoli

s

San D

iego

Tucso

n

Rivers

ide

Cleve

land

Sum

Of M

arkets


RENT GROWTH CONTINUES TO LAG IN TIER 1 MARKETS

Source: Axiometrics Inc., CBRE Econometric Advisors, Q4 2017.*Market tiers based on market classifications from the CBRE Cap Rate Survey

• YOY rent growth:Tier I markets: -1.2% Tier II markets: 2.0%Tier III markets: 1.2%

• Tier II and III rent growth tends to outperform during the later stages of the business cycle.

• CBRE EA forecasts slowing rent growth across Tier I markets as a whole over the next eight quarters.

• Investment volumes by metro somewhat reflect rent growth trends by market tier. The largest markets—where rent growth is often weakest—have recorded YOY declines in investment volume, while volume has held up or accelerated in smaller markets.

CHANGES IN RENT GROWTH BY MARKET TIER*

-10

-8

-6

-4

-2

0

2

4

6

8

2004

.420

05.2

2005

.420

06.2

2006

.420

07.2

2007

.420

08.2

2008

.420

09.2

2009

.420

10.2

2010

.420

11.2

2011

.420

12.2

2012

.420

13.2

2013

.420

14.2

2014

.420

15.2

2015

.420

16.2

2016

.420

17.2

2017

.4

Tier I Tier II Tier III


NO Q4 SPIKE BUT VOLUME REMAINS STRONG TO END THE YEARQ3 VOLUME FLAT, YEAR OVER YEAR

Source: Real Capital Analytics, CBRE Econometric Advisors, Q4 2017.

• Cap rates were flat in Q4 2017, QOQ, and down 10 bps, YOY.

• Cap rates are now 60 bps below their pre-recession lows.

• 2017 investment volume was down 6.9%, YOY—to $147.0 billion from $157.8 billion.

• Q4 2017 volume was down 8.3%, YOY.

• Increases in short- and long-term interest rates during Q4 2016 and Q1 2017 contributed to the lower Q1 volume, impacting the 2017 total.

• The recent growth in investment volumes can be partially attributed to the surprisingly robust net absorption that is keeping vacancy rates fairly stable as completions continue to rise across markets.

• Global growth and tax cuts should act as tailwinds for volume in 2018.

4

5

6

7

8

9

0

10

20

30

40

50

60

Q1 20

03

Q4 20

03

Q3 20

04

Q2 20

05

Q1 20

06

Q4 20

06

Q3 20

07

Q2 20

08

Q1 20

09

Q4 20

09

Q3 20

10

Q2 20

11

Q1 20

12

Q4 20

12

Q3 20

13

Q2 20

14

Q1 20

15

Q4 20

15

Q3 20

16

Q2 20

17

Transaction Volume Average Cap Rate

TRANSACTION VOLUME ($, BILLIONS) CAP RATE (%)


SUBURBAN

METRO TIER

All I II III

4.96 4.67 5.00 5.52

5.49 5.15 5.58 6.05

6.32 5.95 6.25 7.17

Class A

Class B

Class C

INFILL

METRO TIER

All I II III

4.67 4.40 4.70 5.42

5.15 4.80 5.24 6.03

5.91 5.45 5.87 7.25

Class A

Class B

Class C

INFILL

METRO TIER

All I II III

-1 4 -6 -10

0 8 -15 0

-9 -6 -17 -8

SUBURBAN

METRO TIER

All I II III

-7 -1 -15 -7

-6 2 -16 -6

-9 -2 -15 -13

Change vs H1 2017 (BPS)

AverageRate (%)

Source: CBRE Research, CBRE Capital Markets, H2 2017.

CAP RATES—U.S. MULTIFAMILYRATE COMPRESSION CONTINUED IN TIER II AND TIER III MARKETS DURING H2 2017

Copyright (C) 2018, CBRE Econometric Advisors (CBRE EA). All rights reserved. Metropolitan employment forecasts are copyrighted by Moody’s Economy.com. Sources of information utilized in this report include CBRE, CoStar, Moody’s Economy.com, and CBRE EA. The information presented has been obtained from sources believed to be reliable but its accuracy, and that of the opinions and forecasts based thereon, is not guaranteed. All opinions, assumptions and estimates constitute CBRE EA’s judgment as of the date of the release and are subject to change without notice. The information and material contained within this product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security or real estate assets. This product does not take into account the investment objectives or financial situation of any particular person or institution.

CBRE EA holds all right, title and interest in this product and the proprietary information contained therein. This product is licensed to the Licensee for use in the ordinary course of the Licensee’s ordinary business, subject to the restrictions set forth herein. Unless otherwise agreed to in writing by CBRE EA, Licensee shall not provide this product to, or permit their use by or for, any third party, including, without limitation, any parent, subsidiary, affiliated entity or franchisee of Licensee. Licensee agrees to hold this product and all proprietary information contained therein in strict confidence and further agrees not to sell, sublease or disseminate this product including, but not limited to, computer readable data files, either in whole or in part, without the prior written consent of CBRE EA. Licensee agrees to acknowledge CBRE EA in any reports, presentations or any other materials produced by Licensee using this product as the source of the data in which such report, representation or other material is based. CBRE EA hereby represents that it will use commercially reasonable efforts to deliver the scope of services free from any defects in design, materials and workmanship, and free of “viruses” as such terms are understood in the computer industry.

Matt VanceEconomist | Director, Research and Analysis+1 303 628 [email protected]

Maximilan SaiaEconomist+1 213 613 [email protected]

mailto:[email protected]

mailto:[email protected]

apartment overview and outlook q4 2017 · since its q4 2004 peak of 69.2%; in q4 2017 it was 64.2%....

Documents